2024 Mid-Year Outlook: What's Next for the Australian Stock Market Amid Economic Recovery?

Since the beginning of the year, Australian stocks have posted solid returns. In the first four months, the S&P/ASX 200(.XJO.AU) index ascended by 4%, frequently reaching new all-time highs, as investors cheered better-than-expected half-year corporate results and held high hopes for interest rate cuts later this year.

However, influenced by the volatility surrounding interest rate cut expectations and a weak showing from mining stocks, the market has seen fluctuations post-April. Despite this, the ASX 200 has achieved a YTD yield of 2.33%.

What Lies Ahead for Australia's Economy?

Expectations of an economic recovery

So far this year, Australia has navigated through a challenging economic landscape with high interest rates and cost of living pressures exerting a significant burden on households and the wider economy. Currently, the economy is showing signs of softness as the Reserve Bank of Australia (RBA) maintains its commitment to curbing inflation and wage growth. However, both the market and the RBA predict that after hitting a low mid-year, the economy will regain momentum under the backdrop of an upswing in consumer behavior.

Ric Deverell, Chief Economist at Macquarie Group, highlights that despite the current unfavorable economic conditions in Australia, the foundations for a recovery and stronger performance in the coming year are firmly in place.

According to Deverell, "The worst is probably happening right now. I think that as the tax cuts roll in the second half of the year, growth will start picking up again and 2025 will feel much better than this year." This optimistic outlook suggests that upcoming tax cuts will play a crucial role in revitalizing the economy, setting the stage for a more prosperous 2025.

Persistent inflation delays monetary easing timeline

The combination of sluggish growth and persistent high inflation data seems firm enough to make the RBA cautious about decreasing interest rates too soon. Throughout the current year, the continuous inflationary pressures have compelled RBA to maintain its policy rate steady at 4.35%. The recent statement from RBA was generally hawkish in tone, while policymakers deliberated on the possibility of raising interest rates, a reduction was not on the table. Presently, the probability of an interest rate hike at the next RBA Board meeting stands at 35%.

According to Bloomberg, market forecasts now predict that the RBA will hold rates steady throughout 2024. As inflation is anticipated to decelerate, it is expected that the central bank will embark on a cautious and gradual cycle of monetary easing starting from early next year.

Labor market remains the key variable for the economic outlook

The labor market remains a pivotal determinant in the economic forecast, particularly concerning the potential for increased household incomes to translate into consumer spending. Although the unemployment rate has already seen a significant uptick, rising nearly half a percentage point over the past year—from 3.6% in May 2023 to 4.0% in May 2024—the figures are still situated at the lower end of the spectrum from the past decade. Moreover, both the employment-to-population ratio and the participation rate consistently exceed their pre-pandemic benchmarks.

In its May monetary policy statement, RBA acknowledged the likelihood of a continued escalation in unemployment until mid-2025. Bloomberg data indicates that market analysts project the unemployment rate to climb to 4.4% by the end of this year and to stabilize at 4.5% in 2025.

Here's the Bloomberg consensus for the aforementioned core economic indicators:

What's Next for Australia Stock Market?

According to Bloomberg, the ASX 200 is currently positioned for a potential 3% increase from its aggregated 12-month price target.

In their June outlook report, Morgan Stanley raised their mid-term target for the ASX 200 to 8100 points by 2025. The firm noted that "the recent repricing for rates to remain higher for longer is linked to stronger growth as opposed to significant reflation risk and a return to rate hikes." They also anticipate that the significant performance gap between resource and banking stocks witnessed in the latter half of the year may begin to narrow.

VanEck believes that the upward price movement is sustainable given valuations are attractive and the increasing likelihood of a soft landing is supporting market confidence. Furthermore, they are bullish on the prospects of Australian mid-caps and equal weight sectors, predicting they are poised to outperform during the next phase of the market recovery. This optimism is primarily due to the fact that "smaller-sized companies offer more upside potential through market share expansion," in addition to having attractive valuations and performance. From a sectoral perspective, A-REITs, industrials, and consumer discretionary are among their top selections.

Source: Morgan Stanley, VanEck, Macquarie

Final thoughts on Australian stock market outlook 2024

In conclusion, the Australian economy is poised for a recovery despite current challenges like high interest rates and inflation. The ASX 200 is expected to see a 3% rise over the next year, buoyed by stronger growth projections and favorable market conditions. Morgan Stanley's revised target of 8100 points by 2025 underscores this optimism. VanEck's positive outlook on mid-cap stocks and equal weight sectors, such as A-REITs, industrials, and consumer discretionary, further supports the potential for market gains. With tax cuts and improved consumer behavior anticipated to drive growth, the stage is set for a more robust economic landscape in 2025.